AMERICAN SOCIETY OF CORPORATE SECRETARIES
521 Fifth Avenue
New York, New York 10175
August 9, 2002
RE: File No. S7-21-02
Comments on Release No. 34-46079 and Release No. 34-46300
Jonathan G. Katz, Secretary
United States Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Dear Mr. Katz:
The American Society of Corporate Secretaries is pleased to have this opportunity to comment on the Proposed Rule: Certification of Disclosure in Companies' Quarterly and Annual Reports. The Society is comprised of over 3,800 members representing 2,500 corporations in the United States and other countries.
The Society recognizes that, as described in Release No. 34-46300, the recently-enacted Sarbanes-Oxley Act of 2002 (the "Sarbanes Act") includes certification requirements that are slightly different than those set forth in Release No. 34-46079, which will necessitate some revision of the SEC's proposal. The Society offers these comments on the proposed rulemaking, as well as initial thoughts on the related legislative provisions. The Society endorses Congress and the Commission's objectives of improving the quality of disclosure and investor confidence by requiring a company's principal executive officer and principal financial officer to certify that, to their knowledge, the information in the company's quarterly and annual reports is true and complete in all material respects.
We will begin our discussion with some general comments applicable to the certification process as a whole, followed by comments concerning the procedural provisions. We will then provide our responses to the series of questions presented by the SEC. In those responses, we will include some specific drafting comments and suggested modifications to the rulemaking.
- Of paramount importance to our members, as well as the investor community, is the development of one single certification process with clear and simple requirements that would satisfy all related legislative, regulatory and self-regulatory provisions. While we recognize that the SEC may not be able to address immediately both of the certification provisions of the Sarbanes Act (Sections 906 and 302), we encourage the SEC to work toward final rulemaking addressing both provisions, as well as any specific concerns of the listing authorities, so that a single certification process results. As indicated in our introductory comments, the Society endorses the concept that chief executive officers and chief financial officers certify companies' quarterly and annual reports. It is important to all our members that the business community work with the government to restore investor confidence.
- A consistent definition for the term "material" in disclosure standards is critically important to the Society, particularly in light of the numerous related legislative, regulatory and listing agency provisions with sometimes overlapping requirements. The Sarbanes Act's use of the disclosure standard for "material" information found in Exchange Act Rules 10b-5(b) and 12b-20 offers some clarity, if it can be applied to all situations where materiality is applicable. We do note that the first element of the Section 906 certification in the Sarbanes Act (that the report complies fully with the requirements of Section 13(a) or 15(d) of the Exchange Act) does not explicitly contain a materiality requirement. However, since many of the Exchange Act's underlying requirements contain a materiality standard, we would urge the SEC to uniformly apply a materiality standard to certifications.
- The timing of the required reports, combined with the global nature of business today and the travel schedule of many CEO's and CFO's, necessitates a certain amount of flexibility by the SEC to allow facsimile and electronic signatures, to be followed up with actual signatures, since signature by power of attorney is disallowed. We encourage the SEC to specify in its rulemaking how the certifications should be delivered. We suggest that the SEC allow that the certifications be filed by EDGAR and that electronic signatures be permitted with the EDGAR filings of the reports. In addition, we suggest that the SEC specify whether the certification must be included on the signature page of the reports, must be filed as an exhibit, must be filed as correspondence or can be filed in any one of the preceding three ways. Registrants could be required to keep on file the original documents containing all of the actual signatures just as they are now required, or to submit the actual signature certification within an additional specified time period. Permitting the certifications to be filed via EDGAR as part of or accompanying the relevant report (with the companies retaining originally-signed certifications) would eliminate the need for the SEC to review, maintain and make available for public viewing, a multitude of separate documents, without limiting the force or effect of the certifications, and would also allow for more efficient access to the information by the investing public.
Comments Concerning Procedural Provisions
- The Society also supports the concept of requiring processes to ensure accuracy in the collection, processing and disclosure of the information required in the quarterly and annual reports. Most members already have well-defined processes because we recognize their importance in ensuring accuracy and consistency.
- The Society endorses the SEC approach to the internal controls and procedures requirement. The proposal would require companies to "maintain sufficient procedures to provide reasonable assurance" in this area, without specifying what those procedures might be. The latitude to develop procedures that fit particular industries, business models, and company sizes is essential to making this proposal workable.
- Likewise, we endorse the SEC approach to the required evaluation, which does not "require any particular procedures for conducting this evaluation." Again, the latitude to develop an evaluation method that fits a particular company is essential to this proposal's workability.
- We strongly encourage the SEC to develop rules making the procedural certification as simple and straight-forward as possible. Requiring the CEO and CFO to certify to the accuracy and completeness of the quarterly and annual reports will itself provide greater assurance to the users of the reports that there are procedures in place to collect, process and review financial information and other disclosures before the reports are filed. Since the additional value of the procedural certification requirements (specifically, the responsibility for internal reporting controls (Section 302) and a review of the evaluation of reporting procedures (the proposed rulemaking and Section 302)) is unclear, promulgating detailed specifications for these certifications would be unlikely to increase investor confidence.
Responses to Questions Presented
- Comments on the Questions regarding the objectives of the proposed certification requirement.
- The proposed certification will not necessarily cause the CEO and CFO of our member companies to be more involved in the preparation of the quarterly and annual reports, because many are generally already quite involved. Oversight of this process is generally a key job responsibility of a CFO. But we believe the certification may improve their familiarity with the details of internal processes.
- Nor would it necessarily improve the quality of the reports, except possibly in companies with currently lax processes.
- However, the certification could help to increase investor confidence, which has been shattered in part by the litany of corporate officials claiming ignorance of facts leading to disastrous financial restatements.
- Comments on the Questions regarding the form of the proposed certification.
- There may be some benefit to requiring the CEO and CFO to certify the quarterly and annual reports, but that benefit is not increased by requiring other or different corporate officers or directors to so certify.
- There is no benefit from having additional corporate officials, other than the CEO and CFO, sign the quarterly reports. It does seem incongruous to require the CEO and the CFO to certify, but not sign, the quarterly reports.
- The certification should cover pre-existing material incorporated by reference. Information incorporated by reference from a document not yet disclosed, such as a proxy statement that is filed after the date of filing of the Form 10-K and the related certification, may necessitate an additional certification to be filed with that document.
- Substantive amendments to quarterly and annual reports should be signed by the same individuals that must sign the reports, and the certification requirement should apply. To do otherwise could leave investors viewing amendments as less reliable or the amendment process as a "loophole" in the certification process.
- Since the certification process imposes some additional administrative and logistical hurdles, we would encourage the SEC to impose it initially on only the annual and quarterly statements. After some experience, the benefits can be reviewed and a decision can be made on applying the certification requirement to additional filings. Because the Section 906 certification provision does not define the term "periodic reports," clarifying its application would be appropriate if the SEC utilizes its general authority over the Sarbanes Act to include Section 906 certification in its rulemakings.
- The proposed certification language is inconsistent, which may lead to some confusion. The Form 10-K proposed certification requires that a company's annual report contain "all information. . .important to a reasonable investor." The proposed Form 10-Q certification provides that the importance of the information is to be determined "in light of the subjects required to be addressed in the report." We believe that the proposed Form 10-Q certification language is preferable because it does not suggest an expansion of the scope of information to be included in the Form. We would suggest similar language be added to the Form 10-K proposed certification.
- Comments on the Questions regarding the potential liability consequences of the proposed certification requirement.
- The Society strongly encourages the SEC to specifically provide in the proposed rule that the certification is not intended to extend the concept of "materiality" beyond that imposed currently. Clarity in the area of standards of materiality is a key concern to the Society.
- In order to achieve the goal of helping to restore investor confidence, false certifications should give rise to Commission action. We note that the Section 906 certification requirement is not qualified to the best of the person's knowledge. However, since the Act generally provides for criminal penalties to be imposed only if an individual certifies the required statement "knowing" that the report does not meet the requirements, we encourage the SEC to maintain the language "to my knowledge" in the final certification forms.
- Likewise, it may help restore investor confidence to treat false certifications by persons shown to have acted with the requisite scienter the same as falsifications in the underlying reports under Rule 10b-5.
- Comments on Questions regarding the proposed internal procedures and controls.
- Companies currently use a wide variety of processes to ensure that required information is properly reported. While it is not possible for us to generalize on our members' processes, we can say that senior management is generally involved in each company's process.
- Most companies already have established processes in this area, although many do not have a formal committee to deal with disclosure matters.
- We would encourage the SEC to give companies latitude to establish a formal committee to identify and consider disclosure issues, to assign this responsibility to a specific committee with broader responsibilities, or to designate an appropriate working group with identified participants to handle disclosure issues. At many companies, a number of individuals are involved in the process but are not necessarily formally joined as a committee. Some small, non-complex companies may not have sufficient disclosure issues to merit a separate committee. We recommend against specifying the composition of the committee or participants. Companies have vastly different organization structures and responsibilities within particular jobs. We do not see any benefit to companies establishing committees that are comparable in terms of their composition.
- Most companies have processes in place to identify and consider performance-related issues, but they do not necessarily center on a committee structure.
- We do not think the proposed rule should set out specific procedures for evaluating effectiveness of the internal procedures.
- Consideration of additional mechanisms to ensure adequate procedures should be deferred until these proposals have had a chance to work.
- A duty of inquiry by the CEO and the CFO is inherent in the certification process. No additional duty of inquiry need be established.
- Comments on Questions regarding certification of review of evaluation of procedures.
- The proposed certification will reinforce the involvement in the oversight process by the CEO and the CFO, but we do not believe that it will necessarily increase that involvement.
- We do not believe the certification should be expanded. Public statements should concern substantive results rather than analyses of processes.
- We recommend against requiring the directors to also certify, as well as requiring the audit committee to so certify. Generally, non-employee directors of our member companies are not involved in the day-to-day management of the company. Requiring those directors to sign certifications would transform their role of from oversight and strategic direction to management. A reasonable way to accomplish the SEC goal would be to require that the results of the evaluation be shared with the board or a board committee. Since Section 302 of the Sarbanes Act requires that the results of the evaluation be shared with the audit committee, we would encourage the SEC to limit its rule to meeting that requirement. This would be consistent with the audit committee's general responsibility for reviewing the quarterly and annual reports, with the related certifications.
- Specifically, we suggest inserting into proposed section 240.13a-15(c) and proposed section 240.15d-15(c) the phrase "or the audit committee of the board" after the term "board of directors."
- We oppose a certification requirement that would apply to "information provided to investors," as was proposed by the New York Stock Exchange (NYSE). Such a requirement would put our member companies in the untenable position of being required to certify "information" without clarity about what information would be covered. In addition, it could dampen companies' willingness to respond to emergency or developing situations with prompt public information or information that does not easily lend itself to a diligence and certification process. We believe the certifications proposed in Release No. 34-46079 and required in Section 302 adequately address the NYSE recommendation for certification of companies' "financial statements and disclosures." In addition, the August 1 news release announcing the NYSE board's adoption of the listing recommendations stated, "The NYSE should defer to the recent SEC order and the Sarbanes-Oxley Act regarding the CEO certifications on the quality of disclosure."
- Comments on Questions regarding the scope of the proposed rules.
- We generally believe that all companies should follow the same basic rules. As we have noted in a few specific comments above, we would encourage the SEC to keep their regulations at a substantive level rather than dictating specific procedures. This will enable small companies to adapt the regulations to their particular needs, without creating an undue burden.
- We believe that applying similar or comparable requirements to foreign private issuers, as is required by the Sarbanes Act, will contribute to accomplishing the goal of increasing investor confidence. Investors in foreign private issuers should have similar information and assurances as do investors in all publicly traded companies.
- Comments on the Questions on general aspects of the proposed rules.
- The current level of participation by the CEO and especially by the CFO in the preparation of periodic and current reports is reasonably high at most of our member companies.
- Likewise, their participation, and especially the CFO's, in the review and evaluation of internal procedures is high.
- The proposed certification requirement would be useful to investors primarily as a reassurance of this participation, particularly after a number of public disavowals of such participation.
- We generally see no additional value in specifically requiring particular aspects of company processes, and in fact worry that such requirements would be difficult to apply across-the-board.
The Society is supportive of the certification process as well as the procedural requirement. Of utmost importance to us is the creation of a single certification process that is simple and clear. We support allowing individual companies latitude in developing their procedures. We thank the SEC for its consideration of these comments. We would be pleased to provide additional information concerning any of these comments or to otherwise work with you in any way that would be helpful as you move to finalize rules governing the certification process. I can be reached at ChevronTexaco, Corporate Secretary, (415) 894-2735, and Susan Wolf can be reached at Schering-Plough, Senior Director, Corporate Law, (908) 298-7354. Either of us would be pleased to coordinate further involvement by the Society, and we expect one or the other of us to be available over the coming weeks.
Lydia I. Beebe
Society Director and Chairman of the Subcommittee on Certification of Disclosure
cc: Peggy Foran
Subcommittee on Certification of Disclosure